In a typical market, declining demand should lead to falling prices; it’s been a tenet of our economy for years. Yet according to D. Eadward Tree, the magazine industry is poised to see a strange reversal.

“Declining demand is supposed to cause lower prices, but the magazine industry’s key suppliers are likely to defy the law of supply of demand in 2018, with both paper companies and the U.S. Postal Service raising prices by a little – and perhaps by a lot,” Tree writes in his yearly print budget forecast.

Contaminated pulp pounds the paper market

As Tree predicted in his 2017 forecast, magazine paper costs are on the rise and should land about 5% up from our midpoint this year. A good part of that is the financial fallout from single-stream recycling. The increased contaminant levels in recycled paper have caused significant disruption in supply, Tree explains. He expects the price of pulp to “soar,” meaning it will be more expensive to make paper. Regardless of demand, this means the supply will be more expensive, by a few percentage points at least.

“While the slowdown of Chinese pulp exports and the weakening of the US dollar are small factors, I think the market bottomed out and if prices didn’t go up and continue to climb, there aren’t going to be any more paper mills,” notes Todd Palkowitsh, Purchasing Manager for Freeport Press, who agrees that paper prices will rise next year. “Every paper mill is losing money and they need the increases to survive. They’ll use whatever reasoning they can to raise prices.

“The minute an opportunity presents itself for any reason, they will continue to raise paper prices,” he continues. “Not necessarily from a supply and demand standpoint but more from a needs-based price realization scenario.”

And what about postal rates?

Meanwhile, back at the USPS, the ongoing “will they/won’t they” on postage increases continues.

“What we know for sure is that postal officials are planning to increase Periodical rates an average of about 2% in January,” Tree explains. “Co-mailed and large-circulation titles will pay less than the average, while smaller titles that don’t co-mail will pay more.”

Beyond that, much is still up in the air. The Postal Regulatory Commission (PRC) is due to conduct its 10-year review of the much-debated inflation-based cap on rate hikes. Tree speculates that the PRC is likely to ease the cap, which could theoretically open the door for hikes of as much as 20% — although that figure is probably high.

Tom Watry, Director of Postal Affairs and Regulation for Freeport Press, agrees that postal rates hikes seem unavoidable. He expects the USPS to file for a rate hike in October, with higher prices going into effect in January of 2018.

“The price change will be subject to the CPI Price Cap and the cumulative over the past 12 months has been 1.9%,” Watry explains. “The USPS does have some CPI percentage ‘banked’ so the overall rates could increase a bit higher than 1.9% but I suspect not by much.”

Much depends on the outcome of the PRC review, Watry explains. If the PRC decides the folks at the USPS are doing their part to reduce costs, gain efficiencies, and maintain the safety and stability of the mail stream, then a rate hike decision could be made faster. If not, and further review is needed, the uncertainty will drag on.

“This scenario could delay any decision on rates until the second proceeding or the USPS could go ahead with the CPI price change in January and then also plan another price change based on what the rate ruling review determines,” Watry continues. “This option is fraught with legal battle scenarios.”

To make this more complicated there is a new bipartisan postal reform bill on the table, Watry adds. “If this bill were to pass it would dramatically change the USPS financial picture and could flip any issues being raised by the PRC for the 10 year rate review.”

While no one knows for sure, consensus in the industry is that the 1.9-2% increase on USPS rates will happen in January. What we don’t know is if there will a second rate case filed and/or any new postal reform that could impact future rates.

Meanwhile, Tree encourages publishers to get savvy. “Any significant breach of the rate cap is likely to face legal challenges, with implementation delayed at least for most of 2018,” he writes. “In any case, the best move for publishers is to work with their printers (or to find new printers) to take full advantage of co-mailing, dropshipping, and other methods of reducing their postage bills.”

Protecting your bottom line…

Clearly, budget planning for 2018 should focus on cutting costs, not corners. In addition to Tree’s suggestion on working with your printer on postage efficiencies, don’t neglect the production end of the equation. The best way to do this is through analyzing work specifications, using technology to improve efficiencies, reviewing distribution methods, and sourcing new suppliers or consolidating existing ones.

In other words, publishers need to seek continued improvement in how they do business and must insist that their printers and distribution partners do the same.